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Compensation and Reward Management

By Manish Bhalla

Meaning of compensation
Something (such as money) given or received as payment or reparation (as for a service or loss or injury) Compensation is an integral part of human resource management which helps in motivating the employees and improving organizational effectiveness. Compensation is the total amount of the monetary and non-monetary pay provided to an employee by an employer in return for work performed as required

Compensation is based on:

Market research about the worth of similar jobs in the marketplace, Employee contributions and accomplishments The availability of employees with like skills in the marketplace, The desire of the employer to attract and retain a particular employee for the value they are perceived to add to the employment relationship, and the profitability of the company or the funds available in a non-profit or public sector setting, and thus, the ability of an employer to pay marketrate compensation.

Compensation Structure
Compensation has become a far more complicated issue than just deciding how much to pay your employees. Employees also have greater expectations of what should be included in their compensation packages, and they may demand specific benefits. Costly or not, building a fair and attractive compensation packages is critical for attracting and retaining employees. When setting up your compensation package, we need to consider the following components Salary and wages. This is usually the single largest component of a compensation package and, not surprisingly, the most common point of comparison used by employees and potential employees. Salary should be tied to a person's skills and experience. Subsequent increases need to be based on an employee's performance, value and contribution to an organization.


Bonuses. Employee bonuses, which are usually paid in a single lump at the end of the year, are one way of providing performance incentives. Long-term incentives. Stock options or stock grants not only provide long-term incentives to employees, but they can also help retain valuable team members. Health insurance. Employer-sponsored health insurance is fairly standard among medium-size companies. And it's a benefit that has great value to employees. Retirement plans. These plans have become popular because they are relatively easy to administer and are less expensive than traditional pension plans. Many employees like these plans because they maintain some control over the amount of their contribution and how the money is invested. Time off and flexible schedules. This includes holidays, vacations, sick days and personal days. An employer unable to offer competitive salaries may close part of the gap by offering more time off or flexible work hours. Miscellaneous compensation. Other forms of compensation to consider include employee assistance programs, which can provide everything from psychological counseling to legal assistance; discounts on company

Example of compensation structure Following are the main components of salary: Basic HRA 40% for non metro cities and 50% for metro cities DA (not very much included in private sector) Conveyance Allowance (800 p.m. exempted) Medical Allowance 1500 p.a. exempted Education Allowance Telephone Allowance Magazine Allowance Furnishing Allowance LTA normally one month basic, exempted once in a span of two years PF Gratuity (4.81%) to be deposited with LIC or authorised financial institutions compulsory bonus or ex gratia or performance based bonus food coupons

Objectives of compensation
Attracting and Retaining Employees To identify different levels of responsibility and accountability and to establish salaries accordingly Compliance with Government Regulations External Competitiveness (Industrywise competitiveness) Recognition of Individual contributions and performance Motivate performance Motivate personal growth Sustain high morale

Dimensions of compensation
1. Overall pay level - Absolute - Relative to comparable jobs 2. Pay dispersion or inequality - Between jobs (CEO vs. entry level) - Within jobs (Admin Asst III) 3. Pay compressors - Societal pressures (US distinct) - Unions - Company culture - Technology: cooperation, contact 4. Incentive pay - Individual - Group

5. Benefits 6. Human capital - Training - Education 7. Job characteristics


8. Diverse standards and costs of living and multiple currencies, exchange rates, inflation/deflation rates, tax systems and tax rates. 9. Maintaining the suitable balance between global consistency and local significance 10. Addressing organizational business changes (expansions, mergers and acquisitions, joint ventures,).

Factors affecting Compensation and Benefits

Complying with local compensation practices, laws and regulations Laws and regulations impact the remuneration of employees in many areas, such as: I. Work hours and compulsory time-off (paid and unpaid) II. Minimum wage III. Overtime IV. Compulsory bonuses V. Employment at will VI. Acquired rights

Accommodating varied employee values and expectations stemming from differences in cultures, languages and communication preferences Economic factors I. Influence of politics and power II. Distribution of wealth across countrys citizenry III. Unpredictability of events (i.e., sometimes rapid changes in rates of inflation, currency) IV. Taxation - Some countries have no income tax, while others have income tax Competitive labor market - the nature of the competition for talent may differ across countries and regions, depending on factors such as: I. Type of talent sought II. Geographic scope of the talent market III. Industries in which the talent may be found IV. Mix of remuneration components

Standardization versus localization Strategies are standardized in keeping with the organizations overall compensation and benefits philosophy. Definite practices tend to be localized to fit the context of country, regional or local conditions Collective bargaining, employee representation and government mandates Employees in most parts of the world are protected from actions that impact their wages and employment conditions. Unions play a very strong role in many countries and sometimes include provisions for management as well as employees. Work councils also offer worker protection.


Internal Equity 1. People want to be treated fairly in all facets of compensation, including base pay, incentives, and benefits. This is the concept of equity, which is the perceived fairness of the relation between what a person does (inputs) and what the person receives (outcomes). 2. Procedural and distributive justice in compensation Procedural justice is the perceived fairness of the process and procedures used to make decisions about employees, including their pay. Distributive justice is perceived fairness of the amounts given for performance. This facet of equity refers to how pay relates to performance

3. Pay Openness - Another equity issue concerns the degree of openness or secrecy that organizations allow regarding their pay systems. A growing number of organizations are opening up their pay systems to some degree by informing employees of compensation policies, providing a general description of the basis for the compensation system, and indicating where an individuals pay is within a pay grade. External Equity Externally, the organization must provide compensation that is seen as equitable in relation to the compensation provided employees performing similar jobs in other organizations. If an employer does not provide compensation that is viewed as fair by its employees, that organization may have higher turnover of employees, may have more difficulty recruiting qualified and scarce-skill employees, and may attract and retain individuals with less knowledge, skills, and abilities, resulting in lower overall organizational productivity. Organizations track external equity by using pay surveys